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October 22, 2010

U of C posts $500 million gain in FY 2010

The University of Chicago’s returned $500 million on investments in fiscal year 2010, said a University report released Wednesday, helping its endowment to an 18.9-percent gain that outpaced many peer institutions.

The endowment was valued at $5.54 billion as of June 30, 2010, the end of fiscal year 2010.

Coming after a year in which the endowment lost relatively little in the midst of a deep recession, the almost 19-percent jump is six points above the median gain for similar investment funds and almost seven above the S&P 500, which gained 12 percent on the year.

“We’re very pleased with the performance, pleased that the market has come back from the lows of ’09,” said Mark A. Schmid, the University’s chief investment officer since 2009.

It’s the second year of comparatively strong financial performance by the University. In fiscal year 2009, the endowments of both Yale and Harvard fell about five percentage points more than the University’s, which lost 21.5 percent of its value.

Schmid credited the endowment’s performance to new Investment Office staffers, a diversified portfolio, and increased liquidity—all of which meant the University’s investment strategy took on less risk.

“Relative to the strategy we had employed in prior years, we have reduced the amount of stock investment, equity investment, by about 10 or 12 percent over the past year,” said Schmid, referring to a process that began in 2008 and which has continued through his tenure.

He noted that the strategy induced less risk than other universities’ endowments.

However, the $500-million gain won’t be felt in the University’s budget until next year, due to a risk-managing mechanism in the way the endowment can be spent.

Each year, the Board of Trustees earmarks a small percentage of the endowment for the University’s operating budget. But endowment returns are allocated the year after they come in, the one-year lag intended to balance long-term growth with spending on day-to-day operations. Moreover, the amount is based on a three-year average; fiscal year 2009's 21.5-percent loss only began to affect endowment spending on the budget this year. It will continue to be felt over the next two years, even as this year’s gains are factored in.

Schmid called that strategy a “smoothing mechanism” that means “we can more prudently plan budgets.” The Administration credits the strategy for its smooth transition into the recession as compared to that of Harvard, for example, which had to freeze faculty salaries and suspend a large construction project for lack of funds. The University of Chicago trimmed departmental budgets, but made no such drastic changes.

Schmid was hired June 2009, a week before the end of the 2009 fiscal year. His office brought in eight new staff members and hired investment managers, who aren’t on the Office’s staff but manage the University’s assets day-to-day, to work in areas like hedge funds and stocks, Schmid said. He said that since the 2008 downturn, “the new focus is risk management.”

“Approximately one-half of the new people are going to focus on risk management,” he said. “The other half that we brought in is in charge of investment strategy and investment policy.”

Schmid said the investment strategy itself was highly diversified, investing in private and international equity, real assets like real estate, and others.

There’s also been a focus on keeping some University assets liquid: “The team has done a really nice job of bringing liquidity to a level that’s really successful,” Schmid said, a strategy that “allows us to very prudently, very easily make the payout to the University.”

He said the 29 Investment officers have 250 years of investing experience between them.

The University’s endowment performed better than most funds with assets greater than $5 billion, according to figures put out by Wilshire Consulting, a firm that tracks institutional investments; the median gain for those funds was just over 13 percent.

The University performed better than many other schools: In September, Yale reported its endowment rose almost nine percent in fiscal year 2010, while Harvard’s rose 11 percent. Those endowments remain the largest in the country, at $16.7 billion and $27.6 billion respectively.

Like the U of C’s, Stanford’s endowment performed above the median, rising 14.4 percent. Columbia University did better—its 17.3-percent endowment boost came closest to Chicago’s.

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